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Economics And The Making of A Perfect Society

March 4, 2016

by Matteo Marsili

We humans are the only species that makes the rules by which we interact. Animals don’t. They are subject to the law of the jungle, while we make laws that govern our behavior and design institutions with “laws of motion.”

So, in the same way as we can build airplanes and make them as efficient as possible, why can’t we also build efficient societies? Each of us has a different idea of what efficient means here, but there are minimal requirements we should all agree with. For example, a society should make collective decisions that are not self-contradictory and that cannot be manipulated by introducing irrelevant alternatives.

Sadly, there is no recipe for organizing a society in such a way as to achieve even these minimal requirements. The problem has no solution besides dictatorship. This is a theorem that Kenneth Arrow, the Albert Einstein of economics, proved in the fifties. Amartya Sen, another economist, argues that this is actually not a bad result. All it says is that individual opinion and interests are not enough to organize a society. You need discussion and a process by which people’s view converge on the common good. That’s democracy. The Greeks might have known this, because in times when they had no time to discuss, they used to turn to dictatorship.

If we can’t design a perfect society, maybe we can aim at understanding the ones we have. In principle, a society is a collection of many interacting individuals, so this looks like the problem of deriving the laws of a collection of many interacting particles, like a gas in physics. If particles are subject to forces, individuals are subject to economic incentives: they will do what makes them better off. There has been a great effort by mathematical economists to derive economic laws from profit seeking behavior of individuals.

Remarkably, this has shown that, in an ideal world where every wishable thing can be traded, letting competitive markets run free is enough to bring the society to an optimum. What a strong argument in the cold war era, when the ideals of free markets (capitalism) were clashing with those of centrally planned (communist) economies! Communism has long gone, but we also realized that our world is far from those ideal conditions where free markets are enough to make things work. On top of that, behavioral economists and neuro-economists have shown that individuals do not just care about their own interests, and sometimes behave irrationally. In spite of a few financial crises after the fall of the Berlin wall, much of our political economics (the “laws of motion” of our societies) are still based on the free-markets capitalist ideology.

Capitalism is similar to economic Darwinism: competition in free markets selects the fittest firms, those producing most efficiently what consumers demand. Yet, as Darwinian evolution has produced strange creatures like dinosaurs, our “free markets” have produced “too-big-to-fail” banks. These, like black holes, are distorting economies’ space-time around them, absorbing all they come in contact with, scaring the world’s economy with threats of systemic failures.

We don’t fly people on airplanes if we’re not sure how those airplanes work. Yet we fly the whole world’s economy on financial markets that are designed by us, with rules that we write. But we don’t understand how they work. Isn’t it a paradox?

It’s a very expensive paradox, given the cost of the last financial crisis. It’s not clear whether we can afford the cost of leaving economics as a pseudo-science. We have made tremendous advances in understanding how collective phenomena emerge from interactions between individuals. That’s Statistical Mechanics, a science whose founding father himself thought of as being naturally suited to understand our societies. We have a great deal of data, and can test hypotheses and falsify theories, which is what science is about.

We cannot make experiments on real societies. Yet there are “economies” of different species of bacteria “trading” nutrients — the microbiomes in our guts, or on our skin or teeth. Bacteria choose, play games, consume and work to produce goods for others. They also have a social life. Microbial communities are a hot topic, because the equilibrium of their “economies” is intimately related to our health. Yet, they could also teach us a lot about economics and provide the experimental test bed for the theories of economic equilibria. This, I believe, is a very exciting research direction, which is why ICTP plans to have a workshop on the economics of microbial communities in 2017.

Today, as never before, we have the tools to advance our understanding of our economies. The making of a perfect society may remain a utopic dream, but at least we can make economics a science that can better inform our globalized society on the choices it faces.

Matteo Marsili is the co-head of ICTP’s Quantitative Life Sciences Section.